Daily Market Reports | Jun 18 2014
By Greg Peel
The Dow closed up 27 points or 0.2% while the S&P gained 0.2% to 1941 and the Nasdaq added 0.4%.
For the third session in a row, the ASX 200 yesterday opened with a dip before grafting higher. While we hover here amidst the uncertainty of Iraq and tonight’s Fed statement, end-of-year forces appear to be at work in the background. They include tax loss selling, institutional window dressing, and tomorrow’s expiry of the June futures contract. To the latter, we note the index drifted off late yesterday to close smack on an options exercise price level of 5400 – a level at which the physical index has done a lot of work this quarter.
Nothing out of the ordinary is expected from the Fed tonight, more likely the same mantra will be reasserted, so there’s little reason to expect significant end of year volatility at this stage. But you never know, and then there’s Iraq. We appear to now be calling them ISIL – the Islamic State of Iraq and the Levant – which presumably means Lebanon is now roped in with Syria. They are within 40 miles of Baghdad but still a very long way from Iraq’s southern oil infrastructure. Analysts at this stage do not expect Baghdad to fall.
No change to policy is expected from the RBA either for the time being, as was clearly evident in the minutes of the June policy meeting released yesterday. Those expecting a rate rise sooner rather than later were put back in their boxes. Here are some highlights:
“The expectation of substantial falls in mining investment, below-average growth of public demand and non-mining investment remaining subdued for a time implied that the pace of growth was likely to be a little below trend over the rest of this year and into the next, before gradually increasing.”
“Forward-looking [labour] indicators were higher than they had been, but still at levels consistent with only moderate employment growth in the months ahead. The spare capacity in the labour market was leading to low growth of wages, which was expected to persist for some time.”
“Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation [ie, budget]. Those uncertainties were likely to take some time to resolve.”
“Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board judged that the current accommodative stance of policy was likely to be appropriate for some time yet.”
And on that note, the Aussie is down 0.7% to US$0.9334. The “degree of stimulus already in place” tends to suggest the RBA would not consider another rate cut unless things take a turn for the worse, but there is certainly nothing here to suggest a rate rise is being contemplated for quite some time.
Critical to the RBA’s “on hold” stance is that inflation is expected to remain within the board’s target band. All of a sudden, this does not seem to be the case in the US.
The US headline CPI jumped 0.4% in May after rising 0.3% in April to reach an annual rate of 2.1%. Geopolitical issues have pushed up the price of energy and the severe US drought has pushed up the price of food. These elements are not included in the Fed’s core measure of inflation, but the core CPI jumped 0.3% in May – its biggest jump in three years – to hit an annual rate of 2.0%, which is the Fed’s stated target.
The Fed must now be concerned that inflation could quickly accelerate. This, under normal standards, would suggest an interest rate rise is needed. And that’s why the Dow fell 50 points from the open last night. But Janet Yellen has focused the central bank’s attention more squarely on unemployment as the more important factor in rate rise consideration. Ben Bernanke long ago targeted a rate of 6.5% which has now been surpassed, but it appears Yellen will not be comfortable with anything above 6%.
Moreover, the CPI data showed US real wages falling 0.2% in May, for an annual rate of minus 0.1%. For inflation to get out of hand, a wage-price spiral must begin. If wages are not rising to match prices, inflation should remain contained. Suffice to say, the Dow finished the session with a gain.
Also keeping the Fed at bay is the US housing market, which is a primary contributor to GDP and continues to show signs of a stall. May housing starts fell 6.5%, quashing hope of a typical spring revival.
Continuing on the subject of inflation, the UK May CPI surprised last night with a fall to 1.5% from April’s 1.8%, representing the lowest annual rate in almost five years. Suddenly the Bank of England’s suggestion that rates may have to rise sooner rather than later appears somewhat hollow. The pound surged in the wake of the guvna’s earlier warning, but last night fell back and sent the US dollar index up 0.2% to 80.60.
The biggest response to the US CPI data was nevertheless felt in the bond market. Having hung around the 2.6% level even as the Iraqi crisis played out, last night the US ten-year yield jumped 6 basis points to 2.66%. Gold remained unmoved nevertheless, at US$1270.90/oz.
With one exception, base metals continued their low-volume range trading last night. Aside from waiting for the Fed, traders are apparently more preoccupied with what’s going on in Brazil than anything else at present. The exception is of course nickel, which jumped another 2%.
A reprieve, of sorts. Spot iron ore rose US30c to US$89.30/t.
The SPI Overnight fell 4 points.
We will need to get through tomorrow’s futures expiry before any trend can re-emerge in the local market, and that will be beholden to the Fed, Iraq and the current budget negotiations. Then there’s one more week before EOFY, which this year falls on the Monday.
Janet Yellen will front a press conference tonight, and after her previous effort, will probably say very little at all.
Rudi will appear on Sky Business at 5.30pm and again around 7.15pm on Switzer.
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